Pension funds are a common way to secure retirement income. But experts warn that Britain’s pension funds might be missing the mark. As a result, you could potentially miss out on thousands of pounds because funds ignore British investment opportunities.
British pensions and pension funds have witnessed many changes in the past. For some, measures often go a step too far, while others claim they don’t go far enough. Recently, experts from many of Britain’s top pension providers have accused pension schemes of a lack of risk-taking and investments in local projects and assets.
Chancellor Jeremy Hunt abolished the tax-free limit on pension savings in his spring Budget. But further changes may be on the horizon as Mr Hunt also vowed to overhaul investment rules. Speaking at the spring meeting of the International Monetary Fund (IMF), Mr Hunt expressed his concerns that British pensioners aren’t getting the returns they expect. Mr Hunt has asked advisors to consult the Exchequer about the best course of action.
The British pensions market is impressive. McKinsey estimates defined benefit (DB) pension scheme assets to be worth around £1.7 trillion. Yet experts are now warning funds’ investment strategies could become outdated. The Chancellor’s council of economic advisers and four other experts will examine British pension funds to ensure pensioners make hefty returns.
Maximise your retirement fund with our panel of pension providers. Click on your chosen provider to get started!
Calls to follow the Australian and Canadian model
The Chancellor said British pension investment rules should follow the Australian and Canadian systems. Both countries allow their pension funds to invest in lucrative, yet often riskier, assets with more ease. Mr Hunt said, “Countries like Australia and Canada have found a way of making sure that they get better returns by consolidating their pension fund industry in a way that makes it easier for them to invest in unlisted and potentially higher growth vehicles.”
Canadian and Australian pension schemes have recently performed better than their British counterparts. In 2022, the Canada Pension Plan Investment Board gained 6.7% while the AustralianSuper fund lost 3%. However, all three of Britain’s largest pension funds underperformed. One of them, the state-backed Nest, lost 10% of its value in 2022.
A big difference is that Australian and Canadian pension funds pool workers’ assets together. Because all the funds are in one big pool, the funds have more leeway in choosing the projects they invest in. The risks may be higher, but so are the potential returns. In Britain, investment managers always need to consider the individual saver’s appetite for risk, limiting their investment options.
Investing in British infrastructure projects and alternative assets
One of the biggest criticisms has been how funds make investments and the lack of British interests. Experts argue there’s reluctance in the City to back British investments, potentially costing thousands in retirement income.
British infrastructure projects are a good example. Although Britain has one of the largest pension markets in the world, its infrastructure projects are often funded by foreign pension funds. The Financial Times reported in 2022 that AustralianSuper, the country’s largest pension scheme, plans to increase its UK assets from its current £7 billion to more than £15 billion by 2026. The fund has previously helped bankroll Heathrow Airport and the King’s Cross redevelopment project.
In Australia and Canada, funds can have as much as a third of a pension scheme in infrastructure assets. Compare that to British funds with around 5% allocation in infrastructure, and you get the picture. Pension experts argue that investing money in pension funds into society will create more jobs, better companies and better retirement outcomes.
British pension funds invest heavily in stocks and bonds - a traditional pension investment strategy. However, stock and bond market volatility in 2022 highlighted the problem with this plan. Although these options had a more stable performance in the past, they are currently riskier options, especially if the fund isn’t very diversified. In a time of volatility, infrastructure projects and other alternative investments could be a safer option, as they aren’t tethered to public stock and equity markets.
Canadian pension funds had the highest allocation to alternative investments. The CPP invested around half of its assets in alternative investment, with the Nest fund having just 16% in such assets.
Balancing risk and reward to secure your pension
But, like with many pension-related matters, copying the Australian or Canadian model isn’t as straightforward. The downside of the fund schemes is that they can be rather expensive - pension fund charges are up to three times higher than in Britain. Peter Glancy of Scottish Widows, one of Britain’s largest pension providers, warned in the Telegraph that while the returns might be higher, there is no guarantee you’ll end up with a bigger pension.
Critics also remind the increased state interference in pension investment should be balanced against the savers’ interests. Choosing the right investment assets shouldn’t be about picking British assets over others simply because they are British. Investing is about maximising returns, after all.
The Government’s plans are set to be a flexible Australian and Canadian-style approach. The collective defined contribution, or CDC, scheme. Britain’s first CDC scheme launched in April at Royal Mail, with pension minister Laura Trott calling it a “landmark moment”. Calls to invest in British projects could also grow louder. The Office for National Statistics (ONS) reported at the start of 2023 that the UK’s foreign direct investment widened to negative £233 billion in 2021, hitting a record low.
However, it’s uncertain what the appetite for a CDC model will be. The current model around defined contribution pensions and auto-enrolment has been a two-decade-long project. So getting companies to switch and focus heavily on British assets might be hard to achieve.
